TAXATION OF THE INSTRUMENTALITIES OR AGENCIES OF ONE STATE OF THE FEDERAL UNION BY ANOTHER STATE UNCONSTITUTIONAL.

It would seem, from the above referred to decisions and precedents, to follow that what is unconstitutional and unlawful for the federal government to do in respect to the States, is equally unconstitutional and unlawful for one State to do in respect to another and sister State; as, for example, the taxing of such an instrumentality of one State as its "borrowing power" by another State. And hence the commissioners hold, in conformity with the opinion of some of the best legal authorities in the country with whom they have conferred, that the bond of a State of the federal Union, issued for the purpose of raising money, or as the acknowledgment of indebtedness, is not taxable by any authority other than the State which issued it. And, in support of this assumption, the commissioners would ask attention to the following citations from a recognized authority :

In the case of Weston v. The City of Charleston (2 Peters, 449), the Supreme Court of the United States, by Chief Justice Marshall, held, that a tax on stock of the United States, held by an individual citizen of a State, is a tax on the power to borrow money on the credit of the United States, and cannot be levied on the authority of a State consistently with the constitution. "Can anything be more dangerous," he continues, "or more injurious, than the admission of a principle which authorizes every State and every corporation in the Union, which possesses the right of taxation, to burden the exercise of this (borrowing) power at their discretion?" A tax on the stock, or bonds of a State is, therefore, a tax on the borrowing power of such State.

The court further held, that a tax of this description was a tax upon contracts;* using the following language: "Congress has power to borrow money on the credit of the United States. The stock it issues

*What interpretation the Supreme Court puts upon the word "contract," as found in that clause of the Constitution of the United States, which provides "that no State shall pass any law impairing the obligations of contracts, is made clear by the following language employed by Chief Justice Marshall, in giving the opinion of the court in the celebrated case of the Trustees of Dartmouth College v. Woodward: "The term contract must be understood as intended to guard against a power of at least doubtful utility, the abuse of which had been extensively felt, and to restrain the Legislature in future from violating the right to property. That anterior to the formation of the Constitution, a course of legislation had prevailed in many, if not all, of the States, which weakened the confidence of man in man, and embarrassed all transactions between individuals, by dispensing with a faithful performance of engagements. To correct this mischief, by restraining the power which produced it, the State Legislatures were forbidden to pass any law impairing the obligations of contracts,' that is, of contracts respecting property, under which some individual could claim a right to something beneficial to himself; and that since the clause in the Constitution must, in construction, receive some limitation, it may be confined and ought to be confined, to cases of this description; to cases within the mischief it was intended to remedy."

is evidence of a debt created by the exercise of this power. The tax in question is a tax upon the contract subsisting between the government and the individual. It bears directly upon the contract. While subsisting and in full force, the power operates upon the contract the instant it is framed, and must imply a right to affect that contract. If the States and corporations throughout the Union possess the power to tax a contract for the loan of money, what shall arrest the principle in its application to every other contract? What measure can government adopt which will not be exposed to its influence? The right to tax the contract to any extent, when made, must operate upon the power to borrow before it is exercised, and have a sensible influence on the contract. The extent of this influence depends on the will of a distinct government. To any extent, however inconsiderable, it is a burden on the operations of government. It may be carried to an extent which shall arrest them entirely."

It is interesting to note that this decision establishes the economic principle, so far as a court of the highest resort can by its decision so establish such a principle, that when a State imposes a tax on its own obligations or on the obligations of its municipalities, it in effect taxes its own borrowing power; and to the extent of the tax reduces the value of its bonds or obligations when issued. The final result of all which procedure is that the State defrays the expense of the assessment, collection and disbursement of an odious, inquisitorial tax without deriving the least advantage from its imposition. All taxes, therefore, levied on evidences of debt, must be in effect burdens on the borrowers, who are usually the persons least able to sustain the weight of taxation. But if the taxation of the instrumentalities of one State by another State is constitutional, the commissioners would ask if such an act is not both inexpedient and unfriendly, especially when it is remembered that some of the States issue their State and municipal obligations, exempt from all taxation? Does not comity and good neighborhood require that the instrumentalities of one State should be respected by all the others as a part of the sovereignty of the State creating the instrument in question?

LIMITATIONS OF TERRITORIAL SOVEREIGNTY AND LIMITATIONS OF THE TAXING POWER CO-EXTENSIVE.

It would seem to be in the nature of a self-evident proposition, although in fact it is by no means so regarded, that the power of a State to tax must be exclusively limited to person and property within its territory and legal jurisdiction. "All subjects," says Chief Justice

Marshall, in giving the opinion of the Supreme Court, in the case of McCullough v. Maryland, "over which the sovereign power of the State extends are objects of taxation; but those over which it does not extend are on the soundest principles exempt from taxation. The sovereign power of the State extends to everything which exists by its own authority or is introduced by its permission.”

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Every nation," says Wheaton, "possesses and exercises exclusive sovereignty and jurisdiction throughout the full extent of its territory. It follows, from this principle, that the laws of every State control, of right, all the real and personal property within its territory. The second general principle is, that no State can, by its laws, directly affect, bind or regulate property beyond its own territory. This is a consequence of the first general principle; a different system, which would recognize in each State the power of regulating persons or things beyond its territory, would exclude the equality of rights among different States, and the exclusive sovereignty which belongs to each of them." (Wheaton's International Law, chap. 2, § 2; Fœlix International Prisé, §§ 9 and 10.)

Protection the correlative of taxation. The correlative of taxation, furthermore, is protection; or, in other words, according to the political theory of our governments, national and State, and in fact of every government claiming the title to be free, taxes are the compensation which property pays the State for protection. "Taxes are a portion which each individual gives of his property, in order to secure and have the perfect enjoyment of the remainder. Governments are established for the protection of persons and property within the limits of the State, and taxes are levied to enable the government to afford and give such protection. They are the price and consideration of the protection afforded." Ingersol, J., Circuit Court of the United States, Duer v. Small. "There is nothing poetic about tax laws. When they find property, they claim a contribution for its protection." Lowrie, Chf. Justice, Tinley v. The City, etc., 32 Penn., 381. Montesquieu, writing with the monarchial institutions of France mainly or solely in view, discusses this subject in his "Spirit of Laws" (Book 13, chap. 1.), as follows: "The public revenues are a portion that each subject gives of his property, in order to secure or enjoy the remainder;" and he further enunciates this common sense and equitable principle, which very curiously the majority of those who undertake to discuss taxation in the United States, wholly ignore, "that the public revenues ought not to be measured by the people's abilities to give, but by what they ought to give." "And what they ought to give,” as has

been remarked by another writer, "can of course only be measured by the benefit they are to derive."

These fundamental principles, defining sovereignty in respect to taxation, are, however, violated, either in theory or practice, by most of the States in the exercise of the taxing power; as, for example, in Massachusetts, where the law defines personal estate for purposes of taxation to include "goods, chattels, money and effects, wherever they are; ships, public stocks and securities, stocks in turnpikes, bridges and moneyed corporations within or without the State."

The claim or argument, however, which the advocates of such a system set up in its defense is, that personal property has no situs, and, therefore, follows and adopts that of its owner. The inconsistency and absurdity of such a claim is well set forth in the following extract of an argument made before the committee of ways and means of the New York Assembly in 1862, by G. P. Lowrey, Esq., in respect to a proposition to amend the laws of New York in such a way as to neutralize a decision of the court of appeals, to the effect that visible, tangible property of citizens of New York, situated beyond the territory of the State, was without the jurisdiction of New York for the purposes of taxation:

"Inconsistency and absurdity struggle for the first place in this claim. Inconsistency, because we reject the rule, by taxing the personal property of non-residents when it is here; absurdity, because it is a confusion of essential ideas; an attempt to make a rule, whose very form admits the actual absence of the property, govern a case where the essential requisite is its actual presence. This most excellent rule of law, so meritorious as to have gained a place in the code of international comity, would be much abused by such an application. Mobilia personam sequuntur is one of the benevolent maxims of the law. It was invented for the convenience of the owner of property; never yet was it made the ground of a demand upon him. It is also a device of comity, by which the State holding jurisdiction of the property permits an act, done by the non-resident owner at his domicil, to have the same effect, touching it, as if done at the locus sitæ. It means, simply, that for the purpose of sale, distribution, or other disposition of the property, any act, agreement or authority, which is sufficient in law where the owner resides, shall pass the property where it is. The use of it is to facilitate affairs of commerce and the distribution of decedents' estates, by enabling parties to dispose of their property without embarrassment from their ignorance of the laws of the country where it is situated (Catlin v. Hall,

21 Vermont, 152.) It would be a more accurate rendering of the rule to say "Personal property follows the law of the owner's domicil," and not as in effect claimed; that the law of the owner's domicil follows the property. "In fictione juris equitas existat." "No fiction," says Blackstone, "shall extend to work an injury; its proper operation being to prevent a mischief or remedy an inconvenience, which might result from the general rule of law." At any attempt to misapply a fiction, it falls within and is terminated by that other authoritative maxim of logic and the common law, cessante ratione legis, cessat ipsa lex. "Fictions of law hold only in respect of the ends and purposes for which they were invented: when they are urged to an intent and purpose not within the reason and policy of the fiction, the other party may show the truth." Lord Mansfield.* But it may be said, that the State in taxing personal property situate beyond its territory, does not in fact tax the property, but the owner, over whom the State has jurisdiction in respect to such property. In answer to this claim the commissioners quote further from the argument of Mr. Lowrey above referred to.

This claim involves a dangerous inaccuracy, and “arises from a confusion of the idea of the assessment with the idea of the tax. These two stand upon altogether different bases. The assessment is to the person in respect to the property; but the tax is to the property in respect to itself alone. In the order of consequence a tax goes before an assessment. A tax stands upon an existing relation between the property and the State, as protector and protected, and is that portion of the public burden which the property ought to bear because of that existing relation. An assessment stands upon the existing relation between the property and its owner or possessor; it follows the tax, and is merely the method of securing it. The danger, in saying that the tax is to the person in respect of his property, is, that, by the form of the expression we justify an assessment upon a person for all property indiscriminately. We transpose the subjects, and make the law seek out the person, and then tax him according to his property, instead of first seeking property which it has a right to tax, and then as a secondary matter, a person to whom it may be assessed. Even if a knowledge of the property is obtained by inquiry addressed to the owner in the shape of a general assessment, still the rationale of the matter presupposes the right to tax on

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* Examples of double or even greater taxation by different States at the same time on one and the same property; and the gross inconsistencies of procedure which follow the application to taxation of the principle that, "personal property follows the owner," have been already given in this report, see page 15.